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e longterm relationship. ? Maintaining market discipline requires: ? Periodic renegotiation of the contractual relationship. ? Developing a parallel sourcing policy with two suppliers for critical inputs. 17 Strategic Outsourcing and the Virtual Corporation ? Outsourcing ? Allowing subcontractors to perform value creation activities. Outsourcing advantages ?Efficient subcontractors reduce overall costs. ?Better product differentiation. ?Allows for the concentration of available resources. ?Firm bees more flexible and responsive. Outsourcing disadvantages ?Failure to learn from outsourced activity. ?Too much dependence on a single supplier. ?Danger of outsourcing value creation activities leading to petitive advantage. 18 Diversification into multiple businesses ? Related diversification ? Entry into new business activity based on shared monalities in the ponents of the value chains of the firms. ? Unrelated diversification ? Entry into a new business area that has no obvious relationship with any area of the existing business. 19 Related Versus Unrelated Diversification ? Comparing Related and Unrelated Diversification ? Strategy ? Ways of Creating Value ? Source of Bureaucratic Costs ? Related diversification ? Restructuring ? Transferring of skills ? Economies of scope ? Number of businesses ? Coordination among businesses ? Unrelated diversification ? Restructuring ? Number of businesses 20 Creating Value Through Diversification: sharing skills ? Transferring petencies: ? Lowers the cost of value creation activities in the diversified businesses. ? Creates opportunities for differentiation and premium pricing value creation activities. ? Adds value where monalities important to petitive advantage exist. ? Creates value by applying skills for one business opportunity and applying them to another. 21 Creating Value Through Diversification: sharing activities ? Economies of scope ? Sharing of resources and functions by business units creates value in high asset utilization and lower operating costs. ? Economies of scope and scale are closely related. Greater operational capacity and larger markets can help a petitor attain lowcost position. ? Resource sharing creates significant petitive advantage when it outweighs coordination costs. 22 Creating Value Through Diversification: Restructuring ? Superior internal governance ? Place business units in selfcontained divisions. ? Manage divisions in a decentralized manner. ? Link performance to incentive pay. ? Acquisition and restructuring strategy ? Replace nonperforming top management team. ? Dispose of unproductive assets. ? Establish p